For most people who want to purchase a home, it will mean taking on a mortgage payment. These loans, generally designed to take 30 years to satisfy, are often what make homeownership possible. In fact, it is estimated that less than 40% of homeowners in the United States have either paid off their mortgage in full or never had a mortgage, to begin with.
Unfortunately, qualifying for a mortgage can be a bit tricky. Because of the significant amount that needs to be financed in order to buy a home, lenders need to ensure that an applicant will be in a position to satisfy the loan over the years. If there is any doubt, the applicant may be denied a mortgage altogether or will be offered an exceptionally high-interest rate. Regardless of the lender and type of mortgage, applicants are expected to provide a significant amount of documentation to show that they are qualified and worthy of the loan. And one of those key pieces of documentation is a W-2, which provides proof of income through a reputable employer.
However, what happens if you are self-employed? Does that preclude you from homeownership and relegate you to a life of leases or rentals? The answer is no.
Small business owners can qualify for a home mortgage
Long before it comes time to pull together the necessary documentation, business owners need to be savvy so as to ensure that their business pursuits won’t get in the way of their future livelihood. This list below provides some relevant recommendations and guidelines that small business owners should follow if they wish to become approved for a mortgage down the road.
- Watch your credit rating – One of the most important factors in becoming approved for a mortgage down the road will be your credit health, otherwise referred to as your credit rating. Use FICO or one or more of the three credit bureaus (Experian, Equifax, or TransUnion), and be sure to check your credit score monthly or at least once every two months. First, this will help you understand where your score falls, but will also give you a line of sight into any inaccuracies in the report. If you spot a discrepancy in the report, you must file a dispute immediately so that the error can be corrected. Sometimes, disputes can take weeks or months to correct, and it is essential to get out in front of the problem as much as possible.
- Don’t mix your business and personal expenses – Small business owners need to keep business expenses separate from personal ones. When these get mixed, it can wreak havoc on your personal credit score and will make it far harder to demonstrate business profit and loss. Therefore, business owners should open a business-specific bank account and charge work-related to the business debit or credit card. Doing so will make it easier for realistic loans lender to understand and evaluate your personal versus business liabilities.
- Understand your percentage of ownership and be prepared to disclose it – If you are a partial owner in your small business, make sure that you are crystal clear on the percent of the business that you own. Understand that if you own one-fourth or more of the voting stock of your business, then you are classified as self-employed. And this means that you will need to provide a corporate tax return. Further, that tax return will have a major impact on your mortgage application.
Documentation requirements for mortgage applications
If you’re self-employed but wish to buy a home, there are some key things to know before proceeding with the application process. As indicated previously, applying for a mortgage requires a large volume of documentation. That paperwork is even more onerous for the self-employed. Instead of the need to provide just one year’s federal tax return, business owners will be expected to provide at least two years so that they can demonstrate consistent income. This will be the case, especially if you are a contractor or salesperson who receives bonuses or commissions which are often a significant portion of your overall salary. The documentation burden is even more backbreaking when you work for yourself. In this case, you will need a list of your assets, including retirement and brokerage accounts, as well as your liabilities such as child support or alimony payments.
Be prepared with the following documentation if you are looking to apply for a mortgage as an small business owner:
- Income verification – Be prepared to provide two years’ worth of personal tax returns, two years’ worth of business tax returns, and other income documentation, depending on the type of business that you are in.
- Proof of assets – If you have kept your accounts separate per the above suggestions, then it will be easy to provide clear documentation on your personal assets versus your business assets.
- Up to date tax payments – Make sure that your tax payments are recent and paid to the IRS through the current year. It is quite common for owe taxes by owners of small businesses, so be sure you are paid up to can avoid hurdles in your mortgage application process.
Practice patience during the mortgage process
While owning your own business can come with many perks, one of the challenging downsides is that you will need to provide positive earnings in order to get mortgage approval. This means that in some cases and depending on when you want to apply for a mortgage, you might need to exercise some patience. If you reported a loss during the most recent year of business, you may want to wait to apply after your financial situation has improved.
If, however, your business has been turning a profit and you have your documentation in order, the application process shouldn’t be that much more complicated than it would be for a traditional employee of a larger firm. Organization and success are key. If you have the right documentation and your business is doing well, and you have maintained a strong credit score, then before long, you will be holding the keys to your home and will be able to enjoy it for years to come.
Albert Cooper professional blog writer for four years. He always wanted to pursue blogging as his career. You can search his content from google for this keyword-“author Albert cooper”. He is also a content advisor for many blogs like Moneybumber, etc.